IRAs vs. Annuities: The Differences, and Which is Right For You

For the average person, figuring out a retirement plan can be difficult. There are so many different investment options and account types, each filled with strange terms. But retirement plans don’t have to remain a mystery. Through our private client insurance services, we offer both individual retirement accounts (IRAs) and annuities.

IRAs and annuities both provide tax-advantaged ways to save for retirement, but there are distinct differences between the two. Let’s take a closer look at what they offer and how they can help you to plan your financial future.

IRA Information

An IRA is essentially an individual investment and savings account with tax benefits. You open an IRA for yourself, and if you have a spouse, you’ll have to open separate accounts.  

It’s important to understand that an IRA is not an investment itself. It is an account in which you keep investments such as stocks, bonds, and mutual funds. Within certain limitations, you can choose the investments in the account and can change them if you wish. Your return depends on the performance of the investments held in the IRA. An IRA continues to accumulate contributions and interest until you reach retirement age, so you may have an IRA for decades before making any withdrawals.

IRAs are regulated by the IRS, which sets eligibility requirements, limits on how and when you can make contributions, take distributions, and determines the tax treatment for the various types of IRAs.

There are two main types of IRAs—traditional and Roth:

  • Contributions to traditional IRAs are made with pretax dollars and are deductible the year in which they are made. Withdrawals are taxed as income.
  • Contributions to Roth IRAs are made with after-tax dollars, but withdrawals are not subject to tax.

Traditional IRA holders must take required minimum distributions annually starting at age 70½. Roth IRA owners do not. Traditional IRA account holders can begin withdrawing funds at age 59½, although the IRS does allow you to take early withdrawals under certain circumstances. With a Roth, you can withdraw contributions at any time but will pay a penalty if you withdraw any interest or earnings from investments. The early withdrawal penalty for both types of IRAs is 10 percent.

All About Annuities

Annuities provide a source of monthly, quarterly, annual, or lump-sum income during retirement. It makes periodic payments for a certain amount of time, or until a specified event occurs. Money invested grows tax-deferred until it is withdrawn.

An annuity can be jointly owned and don’t have annual contribution limits or income restrictions. You can “fund” an annuity all at once or pay over time. With an immediate payment annuity, fixed payments begin immediately after the investment is made. If you invest in a deferred annuity, the principal grows for a specific period of time until withdrawals are made. There is a penalty for withdrawing funds from the deferred annuity early, prior to the payout period.

Both immediate and deferred annuities can dole out their payments at either a fixed or variable rate. With a fixed annuity, funds are managed by the financial entity. You have no say in how that money is invested. Once the process begins, a fixed amount is paid either as a lump sum or in payments over several years. 

Variable annuities allow choosing from many investment options, such as mutual funds, bond funds or money-market accounts. One version of a variable annuity, called an equity-indexed annuity, tracks a specific stock index. 

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